Are you optimising your expatriate compensation?

Written by
Kate Fitzpatrick

15 Oct 2015

15 Oct 2015 • by Kate Fitzpatrick

Attracting the right talent

The shortage of skilled workers in the global economy, combined with competitive and volatile market conditions, continues to challenge organisations to think more creatively about ways to fill their short, medium and long-term resourcing needs. Do we adopt a ‘build’ or ‘buy’ strategy at the right times, in the right mix, and in the right markets?  Are we identifying our high-potential employees, and ensuring they have the right experiences and opportunities to develop the skills we need for the future? Do we have a compelling employee value proposition that goes beyond a traditional reward strategy, to attract and retain the talent we need across all job levels and geographies? 

In multi-national organisations, the cross-border mobilisation of key talent is also high on the strategic workforce planning agenda as it can be used to facilitate the transfer of skills and knowledge between geographies, help open up new markets, and respond to peaks in customer demand (a ‘borrow’ strategy). International mobility has been proven to be a highly effective enabler of leadership development, and can support the attraction and retention of employees with globally valuable skill sets. 

Traditionally, international assignments were often expensive enterprises, offering benefit-rich terms to only the most senior or business critical people in the organisation. The business case for mobility and the diversity of the global talent pool has changed dramatically in recent years however, giving rise to the need for more flexible and sophisticated approaches to expatriate compensation and benefits.

Home versus host based compensation

According to Mercer’s Worldwide International Assignment Policies and Practices Survey (2015), the home-based ‘balance sheet’ approach to expatriate compensation continues to be the most prevalent method for compensating employees on fixed-term international assignments of up to five years (67% of respondents operate this approach). Maintaining a home country gross salary subject to actual or hypothetical home country taxes (‘tax equalisation’), and providing additional allowances for cost of living, housing and other assignment-related benefits, remains the most effective way to ensure employees are no better nor worse off financially as a result of taking an international posting. This approach usually enables other home country benefits to be maintained (e.g. ongoing social security or pension plan contributions), and keeps the employee within their home country compensation structure, which helps facilitate repatriation at the end of the assignment. 

There has, however, been greater interest in the use of host-based compensation structures over the last several years, as companies have sought to enable more mobility, while keeping costs to a minimum. This might be with a pure local approach – effectively a permanent transfer to the host market and compensation structure – or a local ‘plus’ arrangement where the individual migrates to a host location salary package, but receives additional compensation or benefit elements for a period of time (or in some cases on an indefinite basis). 

Some locations are more appealing destinations than others when it comes to utilising a host approach, with those that offer high local salary levels or low/no tax jurisdictions (or both) being the most popular. By definition this means that host-based compensation approaches do not always reduce costs – they can end up being just as expensive as home-based packages once additional allowances and taxes are taken into account. The underlying business case for the assignment and longer term career planning considerations for the employee must also inform the decision to use this approach. 

Mobility allowances and premiums

Aligning the value of mobility allowances and premiums to the business and development value of an assignment has been a major driver of the ongoing segmentation of international assignment policies we continue to see in the market. For example, the level of allowances payable to a senior business leader being sent on a strategically important assignment may justifiably be higher than those paid to a high-potential middle-manager looking for a stretch opportunity in a popular location. In the first instance, the value to the business is high, while in the second, the developmental or retention value of the employee is arguably most important. 

Common methods for varying allowance levels based on assignment business cases include:

  • Cost of living allowances - using low, moderate or high indices depending on circumstance;
  • Housing allowances - discretion regarding property sizes, levels or suburbs, and whether to deduct a housing contribution from the employee;
  • Education allowances for assignees with dependent school-aged children – international versus private versus local schools; 
  • Assignment premiums - sign-on or completion bonuses, or ongoing cash incentives.

Payroll delivery and currency protection

In a world of volatile currency markets, managing split and multi-currency payroll issues remains an important but ‘noisy’ operational concern for the mobility function, regardless of whether a home or host compensation approach is taken. Most assignees on time-bound assignments have financial commitments in both the home and host locations. As such a mechanism for supporting the delivery of net salary across both locations and/or currencies, or protecting a portion of that net salary which is delivered in the ‘wrong’ place from negative currency exposure, is often required.

High cost/low cost location challenges

Moving employees between locations with similar wage levels, degrees of taxation and cost and quality of living considerations is relatively straightforward. Moving employees from high to low and low to high cost locations is significantly more challenging. When assigning an employee from Sweden to India, for example, the home-based balance sheet approach is likely to be the only way an individual will accept the assignment terms. This is equally as likely to be prohibitively expensive for the Indian business. 

Conversely, when sending the equivalent Indian employee to Sweden, the standard home-based balance sheet approach will not generate a net salary capable of delivering a living wage in such a high-cost country, while a host-based package would reduce the likelihood of a successful repatriation and potentially remove any cost savings associated with appointing an assignee from a lower cost location in the first place. The ‘middle ground’ in these cases can vary dramatically by industry, job role, and geography, as striking the right balance between cost considerations and talent availability is unique to each organisation at any given point in time.